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MND NewsWire features plain and simple interpretations of industry related data and events written in a manner that maintains the interest of random readers while still catering to the perspective of a housing market professional.

A study released last week by Global Insight and National City Corporation
titled House Prices in America concludes that in 71 metropolitan areas
representing 39 percent of the total value of single family homes in the country
those homes were extremely overvalued in the first quarter
of 2006. This is an increase from the fourth quarter of 2005 when 64 markets
representing 36 percent of national home value earned this designation. It is
even more striking to compare the most recent data to the first quarter of 2004
when this same study deemed that overvaluation was insignificant and only three
metropolitan areas and only 1 percent of all single family home values were
thought to be out of line with reality. The study's designers consider that
areas where home prices are in excess of 34 percent over what they determine
to be real prices are excessively overvalued.

The study examined 317 metropolitan areas containing 84 percent of single family
house values in the United States. Eighteen metropolitan areas were recently
added to the 299 for which data had been accumulated since 1985. The study determines
what house prices should be by taking into account not only house prices and
interest rates but also population density, household incomes, and any historical
premiums or discounts exhibited by metropolitan areas over time. These "statistically
normal house values" are then compared to actual prices to determine the extent
of over- or under-valuation.

The study quotes the most recent Office of Federal Housing Enterprise Oversight
(OFHEO) same-house price report as stating that single-family house prices appreciated
at a 7.3 percent seasonally adjusted annual rate during the first quarter of
this year. This continues a pattern of steady erosion in increases since the
second quarter of 2005 when appreciation peaked at 12.1 percent. The current
rate of home price increases, while strong by historical standards,
is the weakest since the third quarter of 2003. In other words, prices are still
going up, just not as fast as they have over the last few years.

The Global/National City report states that this rate of appreciation is actually
highest in the areas which are already the most overvalued. Of the 50 metropolitan
areas most overvalued during the recent quarter, the average pace of appreciation
was 10.1 percent while the 50 most under-valued areas averaged an increase of
2.7 percent. In other words, "the imbalance in prices is exacerbating."
However, the study concludes that "quarter-to-quarter price appreciation is
slowing in most metro areas, and is nearly flat in San Diego and Boston."

Over-valuation is, no surprise here, most notable in Florida
and California. Of the 71 metropolitan areas considered excessively
over-valued, 17 are in Florida and 26 in California. Oregon, Washington State,
New York, and Arizona also have multiple metropolitan areas on the list. Interestingly,
as recently as the first quarter of 2003 18 of the top 71 areas were considered
to be undervalued by the study.

Holding the dubious honor - by a huge margin - of being the most overvalued
area is Naples, Florida which, with an average price of $383,000
was considered to be over-valued by 102.6 percent. As a measure of how rapidly
Naples' prices have increased, in the first quarter of 2002 it was considered
only 1.9 percent overvalued and one year ago 53.3 percent. In second place is
Salinas, California with an average price of $608,600 - 79.1 percent higher
than the study designers consider to be the real value or homes in the area.
Salinas actually decreased since the previous quarter when the average value
was $614,100, 81.4 percent over-value. Following the 71 most overvalued areas
are 45 others with over-values exceeding 20 percent.

At the other end of the scale, the most undervalued area is College Station-Bryan,
Texas with an average price of $94,200, considered 23.7 percent under-valued,
followed closely by Dallas, Texas and Fort Worth, Texas, both under-valued by
slightly over 18 percent, and five other generally large Texas cities such as
Houston, El Paso, and Midland. Texas metropolitan areas, in fact, represent
20 of the bottom 50 on the list. Alabama, Oklahoma, Louisiana, and Indiana also
have multiple SMSAs on the list.

The study lists 66 instances of price corrections of 10 percent or more over
the last 20 years, most notably a 39 percent nose-dive in Lafayette, Louisiana
starting in the first quarter of 1985. The median correction was 17 percent
and half of those areas suffering these corrections were overvalued by 34 percent
or more prior to the downturn. The median period of the correction was 14 quarters.
The more severe the overvaluation, the shorter the duration of the correction
tended to be but the larger the decline in price.National City Corporation is one of the nation's largest financial
holding companies. Its core businesses include commercial and retail banking,
mortgage financing and servicing, consumer finance and asset management. Global
Insight is a forecasting company providing economic, financial, and political
data acquisition and analysis in over 200 countries and 170 industries.

Comments

Housing bubbles and where else can the book writers focus on going forward? How about, Federal Reserve - What are THEY thinking??????

Look, this is better. We may see some areas of the country a LITTLE over valued, but that is the normal wave of business and business patterns. People move and people stay with movements in economies and generational movements. Anyone remember the baby boomers? These BB's are buying houses in the $600's AFTER retirement, and the kids of these BB's, (even if that real estate drops in half) will still be Millionaires. People, why are we trying to STOP business and people from moving forward by saying that values are dropping? Agreed with a reader that noted the Deflationary or Hyper Inflationary scenario!!!

But even then, the US has more safety nets in place for the banking and financial markets than we ever used to, it would be pretty remarkable if we see any real "crisis" in the markets.

Bob Shoemaker

on

Appears the criteria established for this report forgets the most basic of market value principles, the law of supply and demand. Residential appraisals of real estate are based primarily on SOLD comparable properties. If the sellers(supply) of these properties can command higher prices they will. If the buyers (demand) control the market the sellers won't get the higher price. One of the few markets left the analyists, accountants and boards of directors can't control.

M Workens

on

Builders stop building when there is no demand. Banks turn down loans if there is no demand. People stop buying homes because they read the news!

Dan

on

hmmm....so the 2nd derivative of price wrt time is negative in these overvalued markets? It seems somewhat trivial that the simple rate of change (1st derivative) remains positive. And with home prices:income ratios at historic highs in most areas (6:1 in mine, Boston/Cambridge), the incoming generation entering the housing market with historically unprecidented student loan debt, and interest rates at or near historic lows, what factor, precisely, is going to drive prices up if *I* buy?

Mike

on

Dallas values have seemed to shoot up in the first 6 months of the year. Seems to be somewhat consistent with the report of it being one of the largest cities that is undervalued. Probably has more to do with the fact that Texas is a great state to do business in and more and more people continue to move this way.

Joseph

on

It is interesting to note that the most overvalued locations are where many Americans and retirees would prefer to live. Therefore, the overvaluation is simply an indicator of desireability. If desireability holds up, so should the market value. The term overvaluation has its limitations.

Andrew in Calif. mountains

on

Overvalued houses in California. Maybe. But then why aren't more people leaving behind the mild weather, awesome natural beauty and ecological diversity, and decent economy to live in the middle of Texas? Sure, Texas has its good points, but...

Appraiser in NW Florida

on

In NW Florida inventory is at a all time high. With inventories hovering around 3 times the normal level. Supply/Demand is out of balance and it is a buyers market. The estimate on the length of a downturn and the approximate drop in value in the report appears to be right on the money in NW Fl. Given the current inventory & absobtion rates it will take 18 months to move the current inventory off the market if no over houses come on the market. Thats not possible.

David Hoglund

on

I have lived in Orange County, San Diego, Las Vegas, Scottsdale, AZ, and Denver, CO. Now in in conserative place on the East Coast.
From reading the tea leaves many have very much over extended themselves and no regulation to the financial or mortage industry. See the patterns overseas. This is dot.com 2, and those that are not prepared or financially astute should take head. Not domesday, but economics.

Florida Real Esate Investor

on

I see Florida real estate market as a bargin and probably the best value in the country right now. Too many reporters are truely blind to the bigger picture. We have 78,000,000 baby boomers in this country on the verge of retirement and Florida population is expected to increase by 12,000,000 by the year 2030. That is the current population of Pennsylvannia today. Consider that impact. I could write an article about opportunities in Florida that would amaze you at no cost, just ask.

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